Question: LIBOR zero rates are flat at 5% in the U.S and flat at 10% in Australia (both annually compounded). In a four-year diff swap Australian

LIBOR zero rates are flat at 5% in the U.S and flat at 10% in Australia (both annually compounded). In a four-year diff swap Australian LIBOR is received and 9% is paid with both being applied to a USD principal of $10 million. Payments are exchanged annually. The volatility of all one-year forward rates in Australia is estimated to be 25%, the volatility of the forward USDAUD exchange rate (AUD per USD) is 15% for all maturities, and the correlation between the two is 0.3. Assume a USD risk-free discount rate of 4.7%. What is the value of the swap?

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